Words of Wisdom: Thomas H. Lee keynotes Buyouts conference

By Sarah Pringle, Alastair Goldfisher and Chris Witkowsky

Looking back on a life of private equity investing, an executive might be hard-pressed to remember the early days when failure meant losing your house.

But for legendary PE investor Thomas H. Lee, those early experiences still felt close at hand. “By the late 1970s, we had started to buy better companies, and to buy better companies we had to put up capital, equity. … And so we were scraping together, borrowing money on a net worth we didn’t have and mortgaging our houses to put up the equity,” Lee told a room full of emerging managers in late July.

“We were really out there working very hard. Honestly, in the first five years of starting my business I didn’t take a vacation day. We thought we worked hard in the bank, but when you all go out on your own, then you know what hard work is,” he said.

Lee was the keynote speaker at Emerging Manager Connect East July 26 at the Harvard Club in Manhattan, where hundreds of emerging managers, limited partners, consultants and others gathered to hear from executives and others in the business.

Lee kicked the day off with his tales of challenges and triumphs as a new manager. Lee launched his eponymous firm in 1974. He said he raised his early funds by touting a few things: the track record he had built during 10 years of investing deal by deal, but also a few less measurable factors:

“They want to know that you’re a good person. They don’t want any headline risk; that’s a big issue – good companies, good industry, good people. And also we learned to build our back offices. We learned to be compliant,” he said. Lee left his firm in 2006 and launched another one, Lee Equity Partners.

The day was packed with panels of professionals relaying information vital for emerging managers on topics like fundraising, LP communications, deal sourcing, operating without a fund, terms and conditions, the regulatory environment and even the secondary market for emerging managers (who knew?).

Check out some of the Buyouts coverage below and visit pehub.com for all our articles. Emerging managers are a huge topic for us and we plan to continue focusing on this area. So, as always, keep in touch with ideas and feedback.

Lee Equity sets sights on a new fund in 2018

Lee Equity Partners plans to raise its next fund in 2018, the firm’s founder, Thomas H. Lee, said at Emerging Manager Connect East.

Lee also indicated he would move out of the day-to-day mix at some point during the next fund life. “That’s the way of the world,” he noted.

“An institution looking at me says, ‘gee, you’re a young 73,’ but if I’m going to be there five or six years to invest; five or six years to harvest; two or three automatic one-year extensions … ‘I don’t want some 88-year-old running my fund,’” Lee said.

The comments from the private equity billionaire came July 26 at the Harvard Club in Manhattan during a keynote interview with Buyouts’ Chris Witkowsky.

A spokeswoman with Lee declined to comment on a potential target for the next fund.

The New York firm’s Fund I closed on about $1.1 billion in 2008, a couple years following the firm’s inception. In March 2016 it raised about $315 million for a short-duration bridge fund through a secondaries process, a Form D filing at the time showed. Whether the interim bridge fund raised additional capital is unclear.

Lee Equity, which focuses on both control buyouts and growth-capital financings, was launched in 2006 after Thomas H. Lee departed from his eponymous firm, Boston’s Thomas H. Lee Partners.

The PE group targets equity investments of $50 million to $100 million in companies with enterprise values of $100 million to $500 million.

While the founder didn’t offer detail on eventual succession plans, Lee Equity’s investment team has been working together since the founding.

The sponsor in February promoted five investment professionals. Geoffrey Lieberthal, Rahul “Billy” Nand and Collins Ward all became partners of the firm, while Eric Hsu and John Ettinger were promoted to vice president and senior associate, respectively.

Asked by a conference attendee about the shift to a second generation of CEOs in the PE community, Lee commented: “I think the main message is that there’s an entrepreneurial spirit that drives [our partnership group] and I hope it doesn’t get lost in a technocratic way.”

Lee Equity, for its part, has been both a busy seller and buyer in recent months.

Buyouts reported earlier this month that Lee Equity’s auction for Eating Recovery Center was expecting to field second-round bids in mid-July. The Moelis-run sales process for the eating-disorder-treatment company is said to be guiding for a $500 million-plus valuation.

In other recent activity, Lee Equity in April exited its investment in WealthTrust via a sale to HighTower. In November, it agreed to sell Universal American Corp to Wellcare Health Plans Inc. It also struck a deal that month to merge existing portfolio company Carlile Bancshares with Independent Bank Group.

As a buyer, Lee Equity in December bought K-MAC Holdings Corp. The firm partnered with entrepreneur Martin Varsavsky to form Prelude Fertility in October.

Industry hiring more women, but change happening slowly

LPs and GPs are more conscious of hiring, retaining and promoting women, but it’s still a toxic environment for females in private equity.

That was one of the takeaways from a panel discussion during the Emerging Manager Connect East 2017 conference at the Harvard Club in Manhattan on July 26. The conference was put on by Buyouts and VCJ publisher Buyouts Insider.

A lot of women in PE don’t see clear career paths for themselves or any chance to move up to senior roles. “But some firms are starting to intentionally put a line in the sand, saying they are no longer hiring externally but promoting within,” noted Carol Schleif, deputy chief investment officer at the wealth-management firm Abbot Downing. Schleif was speaking on a panel called “Retaining Existing Female Talent in PE.”

Similarly, panelist Susan Hawkins, a partner at BSG Team Ventures, noted a shift on the portfolio side, with more executive hires of women, especially in consumer-oriented businesses and particularly with CFOs.

Schleif said that although more women in PE may be considered for promotion from within, women still face a tough go once they move up, since in senior roles they are expected to act more like their male counterparts.

“If you don’t know who won the football game on Sunday, you can’t be part of the collegial discussion in the office on Monday,” said panelist Hilary Gosher, managing director of Insight Venture Partners.

There are way too many sports analogies in the workplace, added Schleif, who said she tells people that for every sports analogy she hears, she’s going to “say a labor-and-delivery analogy. And that gets the point across.”

The discussion about women in the broad investment community ramped up in recent weeks as five men stepped down, been asked to resign or been accused of misconduct, as revelations of sexual harassment swirl through the venture community.

• In late June, six women spoke to the The Information about stories of sexual harassment involving Justin Caldbeck, co-founder of Binary Capital. He then quit the firm.
• Dave McClure, under pressure for alleged inappropriate behavior toward women, resigned in early July from 500 Startups, the unorthodox firm and accelerator he co-founded seven years ago.
• The New York Times article that called out McClure also spoke with entrepreneur Susan Wu, who said Chris Sacca of Lowercase
  Capital inappropriately touched her. Prior to the Times article, Sacca, who previously announced he is retiring from venture capital, issued an apology.
• Ignition Partners said it forced the resignation of Frank Artale after receiving a complaint of misconduct. The firm on its website said it learned of the complaint against Artale, a managing partner, on July 5 from a third party who requested anonymity.
• AngelList employee Lee Jacobs was put on an indefinite paid leave of absence as an investigation into alleged sexual misconduct takes place. Jacobs in a statement through an intermediary denied the incident.

“Change in the industry is trending in the right direction, and I’m hearing more firms talk about hiring women as a groundswell of support rises in the wake of recent events,” Gosher said. “But if you look at the situation at Uber or the VCs in Silicon Valley, it’s still a toxic environment for women.”

The panel on retaining women in PE, moderated by Alexandra Mores, co-founder and managing partner of Atlantix Partners, said the industry needs to change how women are judged. Often, they said, women investors are judged by the number of deals they do, rather than their performances. “We need to change that yardstick and not just judge on the number of deals,” Gosher said.

Hawkins added that the social construct of judging women in business needs to change, too, so more women gain the opportunity to become rainmakers, the people who bring in new business based on their reputation.

“This [women in business] is a hot topic,” Mores said. “There’s a lot more to talk about than what we can put into a 30-minute panel discussion.”

LPs in first-time funds seek size caps on Fund II

Limited partners who make significant commitments to managers of first-time funds are asking for size caps on Fund II — a term that is more show than substance because it’s unenforceable, according to panelists at an industry conference Wednesday.

“We’ve heard LPs have put a hard cap on the next fundraise,” said Eric Hanno, managing director at AlpInvest Partners at Emerging Manager Connect East on Wednesday. “LPs can get frustrated when they back a successful firm and they grow by three times.”

Other panelists agreed that some LPs are asking for caps on the next fund size as part of overall negotiations of terms on new funds.

Such a term, though, is “unenforceable,” said Gordon Hargraves, partner at Private Advisors. The fund-size cap can be put in place, but by the time Fund II comes around, if the manager is in high demand, the manager may just ignore the agreement, he said on the conference sidelines.

The idea of capping the size of the next fund is designed to build a long-term partnership, said Kelvin Liu, a partner at Invesco.

Asking for a cap is a way to determine the manager’s ambition: Is the debut fund simply a stepping stone to a $1 billion fund down the line, or is the manager serious about operating in the smaller market at a disciplined fund size? Liu said.

“We don’t want to be single-fund investors; we want to be longer term investors,” Liu said.

Interpreting a new manager’s ambition is vital to forming a partnership. “What do these individuals and the firm want to be when they grow up?” said Jason Andris, managing director at Venture Investment Associates. “Is $300 million a stepping stone to $600 million, which is a stepping stone to $1 billion, or are they going to stay in this zone for the next decade?”

Such caps result partly from the aggressive PE-fundraising environment, which Hargraves called a “food fight.” Because of the environment, the GP has the leverage in negotiations around fund terms, panelists said.

“It’s a feeding frenzy right now. … 10 years ago it was crickets,” said Joshua Sobeck, partner at 747 Capital. “Now it’s unbelievable. You have to be there early and have a reputation … in order to get access and help managers to put terms in place that make sense for everybody.”

Thomas H. Lee keynotes Buyouts Insider’s Emerging Manager Connect East conference July 26 at the Harvard Club in Manhattan. Photo by Robert Daniel, Buyouts.